Texas Tax Roundup | June 2023 | Protest Payments, Exempt Organizations, And More!

• Published date: 18 July 2023
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Inheritance Tax, Sales Taxes: VAT, GST, Tax Authorities, Property Taxes
• Law Firm: Freeman Law
• Author: Mr TL Fahring

Welcome back to another hard-hitting edition of Texas Tax Roundup. Let's see what the Texas tax world weathered the scorching month that was June 2023:

Court Cases

Protest Payments

L.L.C., Inc. and Fun Holdings, LLC v. Hegar, No. 13-21-00011-CV (Tex. App.'Corpus Christi June 8, 2023)'The Texas Thirteenth Court of Appeals affirmed the district court's dismissal of a case brought by two sexually oriented businesses (the "Appellants") challenging the fee of $5 per customer entry that is imposed on each sexually oriented business (the "SOB Fee").¹

A "sexually oriented business" is defined as nightclub, bar, restaurant, or similar commercial enterprise that:

• provides for an audience of two or more individuals live nude entertainment or live nude performances; and
• authorizes on-premises consumption of alcoholic beverages.²

The Appellants submitted protest payments of the SOB Fee. Under Texas Tax Code ' 112.051 (Protest Payment Required), "[i]f a person who is required to pay a tax imposed by [Texas Tax Code Title 2] or collected by the comptroller under any law . . . contends that the tax is unlawful or that the public official charged with the duty of collecting the tax may not legally demand or collect the tax, the person shall pay the amount claimed by the state, and if the person intends to bring suit . . ., the person must submit with the payment a [written] protest."

After making the protest payments, the Appellants brought suit in Travis County district court alleging that the Comptroller had unfairly assessed the SOB Fee against them but not similar business that serve alcohol and employ partially nude female employees, like certain sports bars and grills. The Appellants claimed that Texas Tax Code ' 112.052 (Taxpayer Suit After Protest Payment) provided the basis for their right to bring suit against the state. That section provides:

(a) A person may bring suit against the state to recover a tax required to be paid to the state if the person has first paid the tax under protest . . . .

(b) A suit under this section must be brought before the 91st day after the date the protest payment was made, or the suit is barred.

(c) The state may bring a counterclaim in a suit brought under this section if the counterclaim relates to taxes imposed under the same statute and during the same period as the taxes that are the subject of the suit and if the counterclaim is filed not later than the 30th day before the date set for trial on the merits of the suit. The state is not required to make an assessment of the taxes subject to the counterclaim under any other statute, and the period of limitation applicable to an assessment of the taxes does not apply to a counterclaim brought under this subsection.

(d) A taxpayer shall produce contemporaneous records and supporting documentation appropriate to the tax for the transactions in question to substantiate and enable verification of a taxpayer's claim relating to the amount of the tax, penalty, or interest that has been assessed or collected or will be refunded . . . .

The Comptroller filed a plea to the jurisdiction, requesting that the Comptroller dismiss the Appellants case. The Comptroller argued that the Appellants could not bring suit against the state under the protest payment statute because the Comptroller did not "audit, assess, make a jeopardy or deficiency determination, or issue a refund denial." Instead, the Comptroller contended that the Appellants voluntarily submitted the SOB Fees. Thus, the Appellants could not bring suit because there was no "claim relating to the amount of the tax, penalty, or interest that has been assessed or collected or will be refunded," as required under the protest suit statute. The district court granted the Comptroller's plea to the jurisdiction and dismissed the case.

The Appellants appealed to the Texas Third Court of Appeals.³ The Texas Supreme Court ordered that the appeal be transferred to the Thirteenth Court of Appeals.⁴

The Texas Thirteenth Court of Appeals affirmed the trial court's granting of the Comptroller's plea to the jurisdiction. In reaching this ruling, the Thirteenth Court of Appeals examined the opinion of the Texas Third Court of Appeals in 1st Global, Inc. v. Hegar, No. 03- 19-00740-CV (Tex. App.'Austin Oct. 29, 2021). In 1st Global, the Third Court of...